The doctrine of substance (or rather substance over form) was introduced into US tax law to distinguish between transactions whose sole purpose is to reduce tax burden and transactions that have real economic benefit (substance).
However in the recent years, being predetermined 1) by the new legislation in a number of offshore territories (BVI, Bermuda, Cayman, Isle of Man, Jersey, Guernsey, etc.) and 2) by banks (mainly Cyprus and Baltic ones) that open accounts for offshore companies, substance has come to mean Economic Substance (effectively physical presence).
It seems logical to us to divide the term Economic Substance into two sub-terms:
It is a combination of factors ensuring (guaranteeing, proving) that the company is an actual resident of a particular country. These factors include:
This list of criteria for true substance is exhaustive. It is usually sufficient to provide evidence of compliance with 50-75% of the above. But if you prefer to take a thorough approach, leaving nothing to chance, then the recommendation is to comply with all the criteria.
A formal economic substance is usually required to comply with a bank’s request to provide evidence that a company has economic substance in its country of incorporation. A bank would normally be satisfied if the following is in place:
Curiously enough, it is currently problematic to exactly define “Economic Substance” because the legislators in offshore jurisdictions have not yet fully formulated the entire set of criteria determining this economic concept, and are likely to cross swords as to whether or not a particular company has economic substance in the given territory. The numerous Guidelines (circulars and clarifications) already published and still awaited by the industry and the Economic Substance Code will all aim to define the Economic Substance.
GSL offers packages for setting up of true economic substance (to comply with statutory requirements, for example, in the BVI) or packages of formal (virtual) economic substance (to comply with requirements of banks and EMIs):
BVI. True Economic Substance
BVI. Formal (Virtual) Economic Substance